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The Supreme Court has sided with victims of the Stanford Ponzi scheme and will allow their lawsuits against the law firms and insurance brokers who worked for Stanford to move forward. In a 7-2 decision written by Justice Breyer, the high court concluded that the Securities Litigation Uniform Standards Act (SLUSA) does not prevent several state court class action lawsuits against law firms and insurance brokers who represented Stanford from proceeding. The Court found that the class action lawsuits at issue concerned “uncovered securities,” meaning securities that are not traded on a national exchange, while SLUSA only covers securities traded on such exchanges. Thus, SLUSA could not prevent these state court actions.

SLUSA prevents class actions brought under state law when the actions concern “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” The issue before the Court was the scope of this language and whether it went beyond cases concerning misrepresentations that were material to the decision to buy or sell a covered security. The lawsuits in question concerned Stanford’s CD program. Stanford falsely told its clients that it used the proceeds from the sale of its CDs to buy securities. The Court concluded that these CDs were not “covered securities” under SLUSA and that it did not matter that the proceeds were supposed to be used to buy securities. The Court said there was no material connection with a transaction in a covered security.

Justice Kennedy wrote the dissenting opinion, joined by Justice Alito. He argued that the phrase “in connection with” should be interpreted broadly. He also argued that the majority opinion could curtail the ability of the SEC to bring enforcement actions against fraudsters. Justice Breyer answered that argument by noting that both the SEC and the DOJ had brought numerous successful proceedings against Stanford and its affiliates.

The four lawsuits in question were originally brought by four victims of the Stanford Ponzi scheme against law firms and insurance brokers whom the plaintiffs accuse of assisting Stanford in perpetrating its fraud on investors or concealing the fraud from regulators. The Northern District of Texas originally dismissed the lawsuits under SLUSA. While it recognized that the CDs at issue were not covered securities, the fact that Stanford represented that it was investing its investors’ money in nationally-traded securities meant the allegations in the lawsuit were covered by SLUSA. The Fifth Circuit reversed, finding that the crux of Stanford’s misrepresentations involved the uncovered CDs and that the company’s misrepresentations about its investments in covered securities was too tangential to the lawsuits’ claims. The Supreme Court’s affirmation of the Fifth Circuit’s decision will allow these lawsuits to move forward in the trial court.

A copy of the Supreme Court’s slip opinion can be found here: http://www.supremecourt.gov/opinions/13pdf/12-79_h3ci.pdf